401(k) plans, unlike IRAs, may not be divided upon divorce by simply transferring funds from one account into another. To divide a 401(k) in a Georgia divorce, it is necessary to have a Qualified Domestic Relations Order approved by a judge once the divorce has been finalized. This order, commonly referred to as a QDRO, is not the Final Judgment and Decree of Divorce. A QDRO is an order that is separate and distinct from the Final Decree of Divorce and must generally be prepared by one party’s attorney and presented to both the administrator of the retirement plan subject to division and the presiding judge for approval. It is highly advisable for any couple seeking to divide a 401(k) upon divorce to engage an attorney who specializes in asset division to ensure the QDRO necessary to divide the 401(k) to ensure that the order complies with the Retirement Equity Act of 1984. The Retirement Equity Act is a federal law that allows retirement plans, such as 401(k)s to distribute money to someone other than the plan participant. See Internal Revenue Code § 414(p) and ERISA § 206(d). In other words, this federal law allows 401(k)s and other retirement plans to be divided between spouses upon divorce.
The division of one or both spouses’ 401(k) upon divorce is a complicated matter involving both legal and financial matters. Below are a few issues that should be considered prior to dividing a 401(k) upon divorce. However, as each matter unique and often the specifics of 401(k) plans vary from employer to employer, it is important to consult a Georgia attorney who is well versed regarding the division of 401(k)s.
Is it really a 401(k)?
During a divorce in Georgia, it is mandatory for each spouse to disclose financial assets to the other party, including any retirement accounts. Although this process ensures that both spouses are aware of the retirement accounts held by the other spouse, the parties may still be unaware of exactly what kind of account that retirement account is. Prior to seeking to divide a retirement account via a QDRO, it is imperative to ensure the account is a defined contribution plan such as a 401(k). This is important because there are other types of retirement plans, such as pensions or defined benefit plans, cash balance plans, military retired pay and federal pensions that may not be divided with a QDRO.
What is the date of division?
It is important for any Marital Settlement Agreement or Marital dissolution Agreement outlining the division of a 401(k) to clearly state the date of division. Although this may seem like a relatively unimportant notion, failing to clearly state the date as of which the 401(k) is to be divided may lead to needless and costly litigation regarding whether a 401(k) should be divided on the date that is most preferably to the owner of the account or the date that is most preferable to the recipient of the funds.
Who bears the risk of loss?
Once the date of division has been determined, the next consideration that must be made is which party will bear the risk of loss in the event the retirement account suffers a loss prior to division. Generally, there is some gap of time between the date as of which the account is to be divided and the date on which the account is actually divided and funds are actually transferred to the recipient spouse. With that being said, especially in light of the current financial market, this time gap could result in a 401(k) that held $100,000 as of the date of division suffering a loss and only amounting to $50,000 when the account is actually divided. If such a contingency is not address in the Settlement Agreement the parties will likely differ on the subject to who bears the risk of this loss. To avoid the confusion and the likely litigation that may ensue in the event this contingency is not address in the Settlement Agreement, it is best practice to include language such as the following in the Settlement Agreement. This language will vary depending on which party will in fact bear the risk of loss should the retirement account lose value prior to actual division.
“Husband shall receive 50% of Wife’s Employer 401(k) Plan as of December 1, 20014, including investment earnings and/or losses on that amount from that date until the date the funds are completely distributed to Husband.”
“Husband shall receive 75% of Wife’s Employer 401(k) Plan as of October 1, 2014, which amount shall not be adjusted for investment earnings and/or losses from that date until the date the funds are completely distributed to Husband.”
Who drafts the QDRO?
Will the husband or the wife draft the QDRO? This is a question that often goes unanswered once the final details regarding how the account will be divided are settled. Although this one question is oft overlooked and unanswered, the answer generally becomes very important to the parties once the divorce has been finalized and the QDRO must be drafted. This is so because most divorce attorneys do not view drafting and submitting a QDRO as part of the underlying divorce action and generally charge additional fees to do so. Additionally, many divorce attorneys simply do not draft QDROs, resulting in the party charged with drafting the party having to seek out and compensate a QDRO attorney. Many parties do not which to take on this additional trouble and expense and will seek to avoid taking up this responsibility if this decision is not made prior to the finalization of the divorce and memorized in the parties Settlement Agreement.